J.M. Smucker Earnings Call Insights: Food Price Turnaround and Volume

On Thursday, J.M. Smucker Co. (NYSE:SJM) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts.

Food Price Turnaround:

Eric Katzman – Deutsche Bank: It sounds like maybe the amount of people that are walking through the center of the stores these days.

Richard K. Smucker – CEO: No.

Eric Katzman – Deutsche Bank: I guess, Richard and Vince what are the conversations you’re having with the retailers about really in all series since the lack of movement into the center of the store and we’re hearing reports that maybe it’s the perishable stuff upfront that’s moving. So maybe, I don’t know, did the retailers not like care as much, because there are higher margin perishable stuff is going and kind of how are the conversations going to rejuvenate center of the store traffic.

Richard K. Smucker – CEO: Well, Eric, this is Richard. I’ll start and Vince can certainly add probably more specifics than I can. But still the center of the stores is the most profitable section for the retailer and no one has given up on the center of the store, obviously with the prices that we’ve seen this past year, everyone in our industry and the Consumer Foods industry has suffered a little bit from that, but I think we’re seeing a turnaround, prices are coming down and commodity costs are coming down, and we’re starting to see more movement than we certainly did in the third quarter, and we’re seeing that trend into the coming year. Although, there is still a very cautious consumer out there and they are not stocking their inventory shelves at home. So we think that trend will continue somewhat. We’re assuming the trend improve a little bit. Vince, you might want to add to that.

A Closer Look: J.M. Smucker Earnings Cheat Sheet>>

Vincent C. Byrd – President and COO: Yeah, I guess I would say, I think it’s fair to say that you know categories are not growing, they’re declining and retailers, if they’re growing, they’re probably stealing share from their competitors and that’s been fairly targeted. Net-net, the majority of the feedback that we get despite maybe our results not being where we would like them. We’re getting positive feedback that we’re doing better than most. So, again, as Richard mentioned, we think with some of the softening of the commodity costs, hopefully, we’ll do better and we are going to sharpen our pricing going forward. But the center of the store is very, very important to all retailers.

Eric Katzman – Deutsche Bank: To Mark. Mark, could you quantify a little bit more like you know how much you think pension expense is going to be up in fiscal ’13 as well as the compensation recovery and then how much – just remind me how much Sara Lee was supposed to be accretive and where you think it comes in now I mean is it going to be dilutive this year or is it just less accretive than you originally thought?

Mark R. Belgya – SVP and CFO: Well, in terms of the pension and the compensation cost in total it’s a high single-digit, Eric, so ($0.89) per share and it splits fairly evenly between the two. One thing just to clarify, well, I’m thinking of it on the pension we did talked about the settlement charge and that is above and beyond the normal pension. So, for everyone to say just to kind of keep those two topic separate. In terms of the Sara Lee when we announced the transaction we said that we thought it would contribute about $0.10 in earnings per share so that was the profit on the business as well as the applied interest charges to that. What we are seeing now in 2013 that will basically be about breakeven at an EPS level, clearly the business will contribute at a segment profit, but net-net it will basically be breakeven.

Richard K. Smucker – CEO: This is Richard, Eric. I’d like to have Steve comment more on the Sara Lee business because we’re excited about that. We’ve actually found more things that are positive than we anticipated. It’s just as a complicated business. It take us a little longer to integrate it but, Steve, you might want to share some of those thoughts.

Steven Oakland – President, International, Foodservice and Natural Foods: Eric, it’s Steve. If you think about the business we bought and the Sara Lee Company we bought up from, they were saddled through a series of acquisitions with the number of roast and ground facilities. So, they sold a lot of roast and ground product, mostly non-branded product, to cover those overheads, right. That was the goal to lot of it. So, as we got into these things, we didn’t buy those businesses. But when we took a closer look at them, those are key businesses for key foodservice customers. So, we want to make sure we existed those gracefully. We also see that some of those contracts are intertwined with some businesses we would like to be in long-term, things like Coco and cappuccino and other things for some of those outlets. So as we looked at those two things, we said let’s take pause, let’s serve those customers because we either sell them things today or we could sell them other’s markets products. Let’s try to determine what little markets in their do we want long-term and also quite frankly on the supply chain piece, there were some better, as Vince mentioned in his comment, there were some better things we could spend that team’s time on that are going to have even better long-term returns. So if we took pause and didn’t force the fast integration of that roast and ground business, we could focus on things like Rowland and other projects or other supply chain projects which candidly are more important. So those variables combine, offset – are going to push the earnings back, but the core business, the liquid coffee business, the branded roast and ground business are delivering what we modeled were better margin and to Richard’s point, we’ve had our first several meetings with the news survey company in Europe and we’re excited about the innovation opportunities between the two companies.

Low Prices and Volume:

Andrew Lazar – Barclays Capital: I guess first of is certainly part of as you talked about next year will be a step up in innovation and marketing and sharpening some price points, and volumes still perhaps down a bit year for the year primarily in the first half. So I want to get a sense of with those sharper price points and all the innovation and such perhaps why we still don’t see volume for the year perhaps up a bit. Is it just because we’ll see how we start the year out and it’s still, as you said, kind of rough out there? Second would be with organic sales for next year, two-thirds of it is the acquisition, the other third is mix. Is that basically staying that kind of between your organic piece of volume and pricing, they essentially more or less offset each other and it’s pretty even on that front?

Vincent C. Byrd – President and COO: This is Vince. I’ll take the question. I’ll start it up and then will turn it to the Presidents. But as we looked at 2013, as mentioned in our formal remarks, we believe our first half, we’re still facing a lot of the same dynamics we faced in the last six months of our fiscal year. As you look at things like our peanut butter pricing and some other things, we don’t anticipate that those are going to change significantly in the first half of the year. Secondly, as already noted, the economic climate is still a bit challenging. So I think us like most CPG companies have a little more of a – still there is a more of an upside on the last half of the year versus the first half of the year. We can get into specifics and we can turn it to Mark and Paul and Steve to talk about their respective businesses, but net-net, we have more new products in the pipeline than we’ve ever had. We will (lapse) the 50 new items that we launched last year and so again we’re very, very positive, although we do have some planned decreases in some items that Paul will speak to in the baking category.

Paul Smucker Wagstaff – President, U.S. Retail Consumer Foods: Andrew, this is Paul. When we look at some of the volume declines, some of that is managed decline on our low margin flour business. We actually exited a regional flour year this year and they just had products, so it’s pretty meaningful volume. Also on the Pillsbury side, we did what we called a kick-downsize, which down size, which is similar to what both Betty and Dunkin have done. The units should be that remain the same, but the volume is down because we’ve reformulated those products.

Mark T. Smucker – President, U.S. Retail Coffee: This is Mark, Andrew, on coffee, just generally speaking, I think Vince, said it very well. I think that as you look at the full year of ’13, we do expect modest volume growth in coffee. We have still experience on the hourglass effect that we’ve talked about where you see some shifting of volume out of the mainstream coffee category and into sort of the premium and opening price point areas. Having said that though I think we said last time, our volume declines have moderated in mainstream and actually we were down less in the fourth quarter than the third, and quite frankly, the fact that we play in all of those segments, I think we’re in a very good position. So, between all of our offerings and the premium segment, all of our new products and all of our – some of the expansion that we’ve seen in distribution on our opening price point items should help stem the tide in volume as we go forward.

Andrew Lazar – Barclays Capital: Then, just Richard, one quick one broadly. I think last call you talked about hopefully not expecting this environment to be sort of a race to the bottom from a pricing perspective, given the industry hopefully learned some lessons from last time around when we saw some deflation. Any change or update to that thinking now that we’re quarter later in and how does it reconcile with some of your guys comments around sharpening price points and sort of narrowing some price gaps and things of that nature?

Mark R. Belgya – SVP and CFO: I think we have as an industry have to it responsibly we certainly will. We have the advantage as couple of the teams mentioned here of doing things like where our competitors have already done it before of reducing sizes. We’ve got several categories where we can reduce our size and therefore offer better value to the consumer without impacting our margins. We are going to take those types of steps. We will sharpen our pencil around the holiday period to make sure that we are offering the right price points to our consumers and our customers. And last holiday period, for example, on back-to-school we weren’t even in the business on peanut butter because we had to withdraw from the market. So, we have some specific areas where we can, I think, we might call it sharpen you pencil to offer better value to the consumer without really affecting the bottom line. Now, I don’t see out there a change in strategy at least by the big responsible consumer food companies raised to the bottom. I don’t think that is the case. I think we all learned our lesson a few years ago and recognize that although volume is important, margins are just as important and we want to make sure that the price is right for not only the consumer but for our shareholders.